Donor-Advised Funds Ushering in a New Era in Charity

In October 2016, The Chronicle of Philanthropy rocked the fundraising world with huge news: For the first time, a nonprofit that administers donor-advised funds had pushed the United Way off its perch as the biggest charity in the U.S.

It was only the second time that United Way wasn’t No. 1 on the publication’s annual ranking of the 400 biggest U.S. charities, based on the amount of money they raised. Since the Philanthropy 400 debuted in 1991, United Way had been in first place, except for the one year when the Salvation Army claimed the top spot.

What’s startling about the 2016 ranking is that a manager of donor-advised funds, Fidelity Charitable, now occupies the philanthropy throne, rather than a traditional charity. Fidelity Charitable’s rise to the top signifies the growing significance of donor-advised funds in charity circles.

At DMA’s 2017 Washington Nonprofit Conference, fundraising consultant Jack Doyle will dive into the subject of donor-advised funds during a session titled, “Fishing For the Big Fish: Donor-Advised Funds.”

In 2015, the biggest fish in donor-advised funds — Fidelity Charitable — collected $4.6 billion in donations, compared with the United Way at $3.7 billion, The Chronicle of Philanthropy says. Fidelity Charitable’s haul dropped the United Way to No. 2 on the Philanthropy 400. Another nonprofit manager of donor-advised funds, Schwab Charitable, is ranked No. 5. Fidelity Charitable and Schwab Charitable are affiliated with the Fidelity and Schwab investment powerhouses.

In large part, Fidelity Charitable has grown so much because it has invested heavily in taking the pain out of online giving, Pamela Norley, president of the donor-advised fund administrator, told The Chronicle of Philanthropy.

“Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity,” Fidelity Charitable says.

As explained by The Chronicle of Philanthropy, a donor-advised fund works much like a charitable savings account; donors receive the same tax benefits they would get with a gift to a food bank or homeless shelter, but the donors’ money often is kept in the fund for many years and invested.

“Although the nonprofit managing the fund technically controls the money, donors recommend which charities should get gifts and when,” The Chronicle of Philanthropy says.

The rising popularity of donor-advised funds is borne out in Fidelity Charitable’s own results: During the first nine months of 2016, it distributed a record-breaking $2.3 billion in donor-recommended charitable grants, up 15 percent from the same period in 2015. Since its founding in 1991, Fidelity Charitable has granted nearly $25 billion to public charities. Today, the average grant is about $4,300.

Administrators of donor-advised funds like Fidelity Charitable and Schwab Charitable could see their assets swell even more in the near future. Money Magazine points out that if President-elect Trump and congressional Republicans make good on promises to cut tax rates, the tax deduction for charitable giving could be watered down as early as 2017. Through a donor-advised fund, a philanthropist can better manage the tax benefits of charitable giving, the magazine says.

As interest in donor-advised funds has intensified, so, too, has scrutiny of them.

A recent report from the Institute for Policy Studies, a liberal think tank, calls for an “urgent reform” of the philanthropy sector to, among other things, “discourage the warehousing of wealth” in donor-advised funds and private foundations.

A harsher critic of donor-advised funds is Ray Madoff, a law professor at Boston College and director of a philanthropy think tank at the college’s law school.

“As donor-advised-fund sponsors are becoming America’s biggest charitable entities, concerns about them become ever more consequential,” Madoff wrote in The Chronicle of Philanthropy. “Most troubling is that there is no evidence that the benefits from these funds are going to the public. Instead, most of the benefits appear to be going to America’s richest people, biggest financial houses and a host of investment advisers across the country.”

Despite the skeptics, donor-advised funds continue to carve out an undeniably bigger piece of the charitable pie. According to a 2016 report from the National Philanthropic Trust:

  • Charitable assets in donor-advised funds increased nearly 12 percent from 2014 to 2015, winding up at $78.64 billion.
  • Contributions to donor-advised funds ticked up 11.4 percent from 2014 to 2015, totaling $22.26 billion.
  • The number of donor-advised accounts rose from 242,390 in 2014 to 269,180 in 2015.

In its report, the National Philanthropic Trust predicts further growth of contributions to donor-advised funds, but probably not at the same torrid pace of recent years — a period when growth was fueled by uncertainty about tax policy, anxiety over the political environment and other market conditions.

Accounts for donor-advised funds now outnumber private foundations by 3 to 1, and the National Philanthropic Trust envisions this trend will continue as donors become more knowledgeable about these funds.

Eileen Heisman, CEO of the National Philanthropic Trust, says donor-advised funds “are a dramatically growing philanthropic vehicle and are being woven into the American way of giving.”

“While the motivations for giving have stayed the same for centuries, the methods have evolved,” Heisman adds. “Today’s donors are highly engaged in their giving. Baby boomers and millennials, in particular, want a close connection to their philanthropy and to track their charitable impact. [Donor-advised funds] provide the flexibility and management donors are seeking.”

This article is brought to you by the DMA. Click here to register for Nonprofit Federation Conference, Feb. 22-24, 2017, in Washington, D.C.